MOSCOW – Beer advertising is pervasive on Russian television, but not because it’s hot weather and Russians are thirsty. President Vladimir Putin has criticized the advertising, chiding media officials, including the press minister, for promoting profits ahead of health and physical fitness. The point he didn’t make is that, in Russia, the alternative to beer isn’t health. It’s vodka.
The growth of South African Breweries (SAB) explains why. SAB will shortly launch new Russian brands of beer in a plan to double its brewing capacity in Russia from 2.2 million hectolitres to 4.6 million hectolitres, Alan Richards, SAB’s chief Moscow representative, announced recently. Richards heads Transmark, the European affiliate of SAB, which recently acquired the big US brewer Miller.
The US brewers were too timid to invest in Russia for the past decade; SAB’s initiative shows them how. The expansion is the third at SAB’s Kaluga brewery site, 180 kilometers southwest of Moscow. According to Richards, US$60 million in fresh capital expenditure will be required. More than $100 million has already been spent.
Industry sources claim that SAB’s Russian-branded beer, Zolotaya Bochka (“Golden Barrel”) currently has a market share of 3.4 percent. The SAB brewery also produces three imported beer brands under license – Holsten of Germany, Staropromen of the Czech Republic and Miller of the US. Their volume amounts to about one-third of the Kaluga’s brewery’s current capacity. The additional brewery production should come onstream next February, Richards said, and capture a 6.5 percent market share.
The new brands have been devised with a new taste and a new marketing strategy aimed at a different segment of the Russian beer-drinking market. Exactly what that means, SAB executives say, will be kept under wraps for the time being.
SAB began its Kaluga operation in 1998 in the wake of the crash of Russia’s financial markets and banking system, when trade had seized up, the rouble had lost 300 percent of its hard-currency purchasing power, and imports to Russia dropped by more than 40 percent. The conditions encouraged SAB to invest $40 million for a domestic brewery at the moment when imported beer became too expensive for Russian consumers.
SAB’s move into Kaluga followed the decision by Fosters of Australia, a year earlier, to turn down the same brewery, and stick to selling imports in Russia. Fosters said at the time that it was unwilling to invest in foreign brewing unless the Fosters brand was on every bottle and can. That was a marketing decision Fosters now rues.
For Russia’s beer-drinkers, the old days weren’t good ones. Beer was cheap, but the pivniye (pubs) that served it usually added water, topped up with detergent to create the impression of beer-suds. Genuine beer was in frustratingly short supply until the Soviet Union ended in 1991. Since then, however, the Russian thirst has been frustrated in a new way. Genuine imported beer of every type, taste, and source has flooded into the country. The only problem was, the average Russian beer-drinker couldn’t afford to drink it.
When the Russian Market Research Company surveyed consumers nationwide in 1997, asking what alcoholic beverage brands came to mind, those who could named a dozen vodkas, cognac, champagne, wine and liqueurs before beer even got a mention. And this was Baltika, a brand produced by the powerful Scandinavian group, Baltic Beverages Holding (BBH) of Stockholm. Young, high-income Russians were the only ones who said that they could afford Baltika’s price.
In theory, the Russian beer market should be mouth-watering for big Western brewers with international marketing clout such as Heineken, Guinness, Holsten and Bavaria. According to a study by the Boston Consulting Group, Russian beer consumption in 1995 was 17 liters per capita, one of the lowest in Europe. On the other hand, the population of Russian beer-drinkers, multiplied by their 25-liter appetite for beer in the Soviet period, creates a large unsatisfied market, the fastest growing one in Europe.
What happened in Russia, explains Stanislav Tsyrlin, Boston Consulting Group’s expert on beer, “was that cheap Soviet beer was replaced by beer that was relatively expensive. Vodka is cheaper to produce than beer. As prices shot up, real incomes fell, and a 40 percent excise tax was added to beer in 1992. So the Russian drinker switched. In terms of price he had been able to buy five or six liters of beer to one liter of vodka before 1991. This dropped by 1995 to three liters of beer to one liter of vodka. Uncontrolled imports of pure spirit made it much cheaper to get drunk on vodka.” Data gathered by the Boston Consulting Group for domestic and foreign brewers looking for ways into the Russian market show that beer consumption has begun to climb back towards the 35-40 liters per capita that was the average during the 1980s. This is well short of Germany, where drinkers average 138 liters of beer per annum, or Denmark with 120 liters. If European consumption is close to peak, or falling, brewers must look to Russia to fill the biggest unsatisfied thirst for beer still left in Europe.
The strategy of the international brewers such as SAB has been to capture the biggest share of the Russian market as it grows by cutting costs, lowering prices, and spending heavily on advertising. This is good for consumers, but bad news for domestic breweries. From around 300 in 1991, their numbers have slipped to less than half.
Other foreign investors competing with BBH include the Sun Brewing Group, controlled by Indian and British interests; Carlsberg of Denmark; and Turkey’s Efes, which has built a brand-new brewery in Moscow at a cost of $150 million. The cost-cutting strategy is also leading the foreign brewers to contracting for their own supplies of barley, grown in Russia.
SAB believes that part of its larger market share will come from the acceleration of Russian consumption. Part, too, will come from regional breweries losing sales as they face steadily rising costs in competing with the nationally-advertised beer brands.